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China becoming its own asset class: China AMC story
It’s difficult enough for big investors to decide on a China strategy, even after they recognise the necessity of having one. And then there’s the throng of implementation options to sift through. In the melee, one China manager stands out: China AMC.
According to a landmark report by bfinance – Rethinking China’s Role in Emerging Market Equity Portfolios – published in June last year, for institutional investors there are more than 60 active China ‘A’ shares managers and a “very established roster” of more than 70 offshore China equity managers.
There are fewer than 20 China ‘all shares’ offerings available, according to bfinance, a global manager search and investor research firm, although it has encountered more than 30 managers bidding to attract clients in the space, including those willing to launch funds or create customised mandates to join up their China onshore and offshore capabilities.
China Asset Management Co, one of only three Chinese mainland firms granted the first funds management licenses in 1998, and still among the largest, has more than 200 staff in Beijing and other mainland offices and 15 investment professionals in Hong Kong, where it established a subsidiary in 2008. The firm managed US$245 billion as of December 2020, has more than 60,000 institutional clients and 164 million retail investors.
China AMC is a standout from the growing throng for several reasons but perhaps the most important is that, as its Australasian representative, Antony Blazey, puts it: “All we do is China. We have no ‘Asia’, no ‘global’.”
Blazey has been with the firm since 2016, when he helped it to establish an Australian-domiciled fund – an unlisted unit trust – for retail and wholesale investors and offering customised mandates to the bigger funds.
The Australian fund is an ‘all-China’ strategy and invests in China ‘H’ shares (Hong Kong Listed) ‘A’ Shares (Mainland China Listed) and ADRs (US Listed). Chinese mainland companies listed on the Hong Kong exchange, which is an option that many western investors prefer because of ease of access, liquidity and a different set of regulations. They also tend to trade at a discount to the same stocks listed on the main Shanghai market.
The fund’s strategy is overseen by Courtney Xiaopeng Wei, managing director since 2015, after spending four years at SAFE Investment Company, the HK arm of the Chinese sovereign wealth fund which administers the country’s foreign exchange. Prior to that she spent eight years in Boston as a portfolio manager for emerging markets at Batterymarch Financial Management. She obtained her MBA in finance at the Babson Graduate School of Management near Boston.
In an interview last week, Wei said: “I remember saying last year: ‘China will become its own asset class’. It seems to have resonated. For example, despite a trade war with America, exports have risen over the past two years. It is the only large economy to have had growth over the past two years. There are record inflows into the Chinese equity markets.”
The phrase encompasses the numerous paths China is taking to ensure continued growth and implies a level of complexity which demands the treatment usually afforded a whole asset class by professional investors.
And then there’s the size – more than 40 per cent of the MSCI emerging markets index, without even having all stocks represented. The bfinance report notes that many big investors are looking at having separate China-specific mandates, if they haven’t already done so.
Wei says: “Despite all the headlines, Hong Kong is becoming more important to China. It is increasingly becoming a hub for the new economy. For example, it is the second biggest for listings in biotechs… All the dynamic companies are listed in Hong Kong.”
China AMC is a ‘GARP’ manager (growth at a reasonable price). “Growth is in our blood,” Wei says. However, in the short term her ‘China Opportunities’ portfolio, which Australian-dollar investors access, has become “more balanced” due to valuations. “In the medium-to-long-term we will be more growth driven… We had a very big year last year, but valuations went too far. We’re taking a break.”
The Australian-domiciled fund has delivered 16 per cent net return a year, averaged, since inception and is the only China manager in the Morningstar universe to have a five-star rating over five years, she says.
The portfolio holds between 30-50 names and currently includes about 15 per cent in the small-mid-cap category. The firm favours healthcare for the long term, like most managers, and green energy, where it is currently focused on renewable energy generation, such as wind farms.
But it is choosy when it comes to the big cohort of China’s new economy stocks. It sold down its education stocks some time ago, for instance, and has never been tempted into the ‘K-12’ general online education category which until recently boomed as parents seek tutors to help their children through final year exams.
The Chinese Government announced tougher regulations for the market, including guidelines for fees and charges, early last month (June) which caused stocks to tumble and several IPOs to be cancelled.
Wei says: “For some time the Government has wanted to reduce the load on young parents and compliance is now coming through the [education] system. But by and large they are encouraging private sector involvement. It’s just that now they are treating online and offline education in the same way. Our only exposure is to higher education which is very different to K-12 and a much bigger market. We’ll still see M&A activity there.”
She says that there is a lighter touch from the Government in the rest of the tech space but notes that e-commerce platforms are hitting regulatory headwinds around the world.
“We’ve been thinking about this for the past three-four years. At that time the big tech firms were very much liked by consumers but this year things have changed because they’ve had a very good year because of covid-19. Income disparity has increased. Regulatory risk has increased all over the world,” she says.
“We are being more cautious also because of increased competition. The latest is large internet companies getting into group buying. The internet is a winner-takes-all game where scale is all that matters… We’re underweight in the internet space, not just in e-commerce. We’re trying to find companies where they can stand out and continue to grow. And also those companies with less regulatory risk. We try to find ones which are more in line with the values we espouse.”
China AMC is 62 per cent owned by Citic, which is 100 per cent owned by the Ministry of Finance and is the largest conglomerate in China. In 2011, the Government decided to allow minority shareholders and chose a diversified Canadian funds management group, Power Corporation, as China AMC’s first partner. Power Corp now has 27.8 per cent, including 13.9 per cent through its 62 per cent-owned IGM Financial wealth management arm.
China AMC can claim many firsts for the industry including China’s first ETF, developed with the assistance of State Street, in 2004. Prior to that it had developed the country’s first enhanced index fund and first pure bond fund. It launched the first cross-border ETF in mainland China, for the Hang Seng Index, in 2012 and continues to round out the broadest range of ETFs available under the one roof.
